As the cryptocurrency market continues to expand, its implications for monetary policy and financial stability are becoming increasingly critical
Dr. Shamna T C & Ms. Gargee Sarmah
As of 2024, the global cryptocurrency market is valued at $2.43 trillion, a remarkable rise from just over $14 billion in 2017. Bitcoin, the largest cryptocurrency, now boasts a market capitalization of $1.34 trillion, exceeding that of several national economies. This rapid ascent poses unprecedented challenges for central banks, threatening their traditional role in controlling inflation, managing money supply, and ensuring financial stability.
For economies like India, where inflation control and monetary sovereignty are critical, the proliferation of cryptocurrencies could further complicate the central bank’s ability to implement effective monetary policy, especially as the Reserve Bank of India explores its own Central Bank Digital Currency (CBDC) referred to as Digital Rupee.
Cryptocurrencies with their fixed supply mimics the scarcity of precious metals like gold and this scarcity can increase demand, which can drive up the price of a cryptocurrency over time. This contrasts the ability of central banks to print or destroy money to manage liquidity and stimulate or cool down economies.
With an increase in public acceptance, if people begin holding and transacting in cryptocurrency rather than fiat, the demand for the local currency decreases, which can increase volatility and reduce the effectiveness of monetary interventions, particularly in countries like India where fiat money plays a critical role in managing inflation and growth.
Tether (USDT) is a prominent stablecoin, which is a sort of cryptocurrency that keeps its value stable by being tied to a fiat currency, in this case the US dollar. Tether Limited, the corporation that created USDT, states that each USDT token is backed 1:1 by reserves, which can include cash, financial equivalents, and other assets. This is used as a digital cash reserve by many traders to swiftly enter and exit risky cryptocurrency assets to maintain liquidity without actually having to convert it to fiat money. However, the risk lovers who prefer volatility over stability, treat USDT as a temporary ‘parking spot’.
Transparent and equitable regulation boosts Bitcoin’s legitimacy and draw in more institutional capital. The value of Bitcoin may rise if large financial institutions and businesses feel more at ease adding it to their portfolios due to clear criteria. This school of view contends that careful regulation might actually contribute to Bitcoin’s long-term growth by making it safer and more attractive to a larger range of investors.
The popularity of Bitcoin is a result of its decentralized nature and minimal government involvement. Because blockchain technology enables peer-to-peer transactions which eliminate the need for intermediaries, it appeals to investors who value and prefer financial autonomy and transparency.
Users that appreciate Bitcoin’s independence from traditional finance may become hostile to governments that impose onerous restrictions or create obstacles, such as high taxes or rigid usage guidelines. Excessive regulation could restrict the usefulness of Bitcoin, hinder its uptake, and deter users, which could result in a drop in demand and a decline in its value.
Some people think that Bitcoin has an innate store-of-value quality that will last regardless of government policies because of its digital scarcity and hard-coded 21 million coin production restriction, which make it resistant to inflation. According to this perspective, while regulatory action can result in short-term volatility, Bitcoin’s fundamentals and global demand might sustain its value over the long run.
After the recent Donald Trump win at the US presidential election in 2024, the price of bitcoin increased by over 10% and hit a record high of over $75,000. The rise is partially attributable to market optimism on Trump’s administration’s pro-business, deregulated environment, which many believe will help the cryptocurrency sector. Institutional and individual investment in Bitcoin has increased as a result of the Republican Party’s historically pro-crypto regulatory stance, which has stoked expectations of less government involvement.
Furthermore, as worries about inflation and fiscal policy mount, Bitcoin’s appeal has grown due to its reputation as a hedge against economic instability. Markets will find Bitcoin more appealing as a wealth store if they believe that Trump administration policies will devalue the US dollar (for instance, through trade imbalances or inflationary pressures).
It’s hard to ignore how Keynes’ theory of effective demand offers a helpful framework for assessing this class of digital assets as the bitcoin market grows. Similar to Keynes’ assertion that demand for goods and services propels economic activity, speculative demand—which is fueled by investor sentiment, expectations, and market psychology rather than conventional economic realities—is having a growing impact on cryptocurrency valuations.
For instance, the increase in the price of Bitcoin indicates both its use as a transactional currency and the growing trust that both institutional and individual traders have in the cryptocurrency. Furthermore, in line with Keynes’ idea that uncertainty and shifting expectations can have a major impact on economic outcomes, government regulations and global financial instability are significantly affecting the market for cryptocurrencies. As governments struggle with inflation and traditional banking institutions falter, cryptocurrencies such as Bitcoin are increasingly seen as a safe haven.
India’s regulatory ambiguity surrounding cryptocurrencies, including the potential introduction of a Digital Rupee and stricter rules, may impact Bitcoin demand and growth in the country, particularly if a ban or stringent controls are imposed. In contrast, clear and favorable rules in the United States may encourage institutional investment, increasing Bitcoin’s liquidity and global demand.
If the United States and India implement such legislation, Bitcoin might experience tremendous global expansion; yet, regulatory crackdowns in India may cause instability and impede adoption in one of the greatest rising markets. As global perception towards cryptocurrency shifts, the balance between regulation and innovation will be critical in shaping Bitcoin’s trajectory, making it critical for governments around the world to strike a careful balance that promotes growth while mitigating possible hazards.
While the phrase ‘too much money chasing too few goods’ might be perceived detrimental to the economy, crypto assets have the potential to diversify the financial environment, opening up new opportunities for investment and economic progress. The use of blockchain technology and decentralized finance (DeFi) may contribute to increased financial inclusion, particularly in places with underdeveloped banking systems, thereby promoting broader economic activity. Instead of fuelling asset bubbles, well-regulated and innovative crypto markets could help to boost economic growth by establishing new industries, technology, and employment opportunities.
(Dr. Shamna T C & Ms. Gargee Sarmah are Assistant Professors in Department of Economics at CHRIST University. Views expressed are personal)
#cryptocurrency #bitcoin #blockchain #crypto #cryptotrading #cryptonews #fintech #digitalcurrency #cryptoregulation #innovation #decentralization #investment #cryptoassets #financialstability
